Having a good business idea and an entrepreneurial spirit is not enough; you also need funding to get your business off the ground. But with so many options available, knowing which route is right for you can be challenging.
Suppose you’re planning to open a dental practice in your town. You’ve earned your degree in Dentistry, done your research, created a business plan, and gathered the necessary information to get started. But before opening your doors, you need to raise the capital to fund your business.
Here are five financing options available to aspiring business owners like you:
Option #1 Conventional Bank Loans
One of the most common ways to fund a business is through a conventional bank loan. Banks typically lend money to companies that have been in operation for at least two years and have a good credit history. But if this is your first business, you may still be able to get a loan if you have a solid business plan and collateral.
The downside of bank loans is that they often come with high-interest rates and strict repayment terms. For example, you may be required to make weekly or monthly payments for the life of the loan, which can put a strain on your cash flow. And if you default on the loan, the bank could foreclose on your business.
That said, it could be wise to consider a bank loan if you have good credit and can get a competitive interest rate. Just read the fine print before you sign on the dotted line because you could be risking your business.
Option #2 SBA Loans
If you’re struggling to get approved for a conventional bank loan, you can also try to apply for a loan through the Small Business Administration (SBA). This government agency provides loans to small businesses. SBA loans usually have lower interest rates than conventional bank loans and are often easier to qualify for.
Suppose the bank offers an interest rate of 10% on a $10,000 loan, while the SBA might provide the same loan at an interest rate of 7%. In this case, the SBA loan would cost you $700 less in interest over the life of the loan than the bank loan.
The downside of SBA loans is that they often come with longer repayment terms — up to 10 years — which can make them more challenging to repay. And like bank loans, if you default on an SBA loan, the government could foreclose on your business since you’re putting it up as collateral.
Option #3 Venture Capital
If you’re looking for a large amount of funding, consider approaching venture capitalists. These investors provide the capital to businesses in exchange for equity, which means they own a portion of your company.
For example, you’re looking for $1 million in funding and can offer your company equity in exchange. In this case, the venture capitalist would own a percentage of your company — say, 10%. And if your company is successful, the venture capitalist stands to make a lot of money.
The downside of venture capital is that it can be challenging to find investors willing to take a risk on a new business. And if you do find an investor, you’ll have to give up a portion of your company. So it’s crucial to weigh the pros and cons of this option before you decide to go down this route.
Option #4 Angel Investors
Like venture capitalists, angel investors invest in businesses in exchange for equity. However, the most significant difference between the two is that angel investors are usually more willing to invest in early-stage businesses. In contrast, venture capitalists typically invest in more established companies.
For example, say you’re looking for $100,000 in funding for your startup. You might be able to find an angel investor who’s willing to give you the money in exchange for a 10% stake in your company. If your company is successful, the angel investor will make ten times their investment.
The downside of angel investors is that they can be challenging to find, and you’ll still have to give up a portion of your company. But if you’re struggling to find other forms of funding, this could be a good option.
Option #5 Crowdfunding
Crowdfunding is a way of raising money from a large group of people. Many crowdfunding platforms allow businesses to solicit funds from the public, such as Kickstarter and Indiegogo. Both platforms enable individuals to set a funding goal and then solicit donations from the public.
If you reach your funding goal, the money is typically sent to you within a few weeks. And if you don’t reach your goal, the money is returned to the donors. Crowdfunding is an excellent option if you need to raise a small amount — typically under $10,000.
The downside of crowdfunding is that it can be challenging to reach your funding goal without a compelling story or product, and there’s no guarantee that you’ll receive any money even if you reach your goal. But if you’re struggling to find other forms of funding, this could be worth considering.
There you have it — five common ways to fund your business. Before you decide which option is right for you, it’s crucial to weigh the pros and cons of each one. And remember, there’s no one-size-fits-all solution to funding a business. So it’s essential to consider your options before making a decision.